Michael Egorov, the founder of Curve, has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. The plan involves packaging the affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool.
This method allows trapped lenders to exit their positions while permitting outside buyers to determine the value of the distressed claims. The bad debt arose from a crash on October 10, which resulted in over $19 billion in leveraged liquidations. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered losses due to rapid price declines and increased gas costs, leading to a scenario where some liquidations could not occur in time. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value.
Egorov's proposal aims to provide a market-driven solution, contrasting with the bailout approach taken by Aave, which is facing up to $230 million in bad debt following an exploit. The Curve pool would utilize the Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would enable trapped depositors to sell their vault tokens at a discount or wait for a potential CRV recovery.
Buyers would be placing a long-term bet on CRV's recovery, with the token having an 'interesting option-like property' due to its partial backing. The proposal has been presented as a pilot study, with the potential to be applied to similar situations in the future.